The Waiting Game: Life/Annuity Insurers on the Technology Modernization Sidelines

Given that CIOs are ready to move forward, why is there not a greater sense of urgency among life/annuity carriers to replace legacy policy administration systems, and, what will it take for them to make the move?

Erik Stockwell, MajescoMastek

It’s been a great 30 years. The insurance carrier has grown its business, added distribution, got into multiple product lines and built a strong and enduring employee base. So how come when they open the closet door, they have 25 or more policy administration systems, multiple spreadsheet workarounds and people at home with more computing power than at work? It’s time to clean up — but how?

Sound familiar? So many insurance carriers I talk with have found this situation waiting for them in the back rooms of their operation. Recognizing the opportunity that modern technology is providing to improve customer service levels, streamline operations, save costs and increase throughput; many carriers have begun to take on the task of rationalizing their infrastructure.

Still, while P&C carriers seem to be well on their way as a market to transforming their operations and modernizing their technology environments, life & annuity carriers have really just begun their efforts to capitalize on modern technology and to establish new enterprise architectures for strategic growth. Unfortunately, many are opting to leave old systems in place in lieu of the modern technology options. Whether it’s the fear of data conversion for life & annuity carriers, a perceived lack of proven new systems, a combination, or something else, one thing for certain is that sticking with the ‘old’ is a recipe for future failure.

These older systems provide a contradiction: they are expensive, hard to maintain and risky to keep in place. However, they are essentially “paid for” and for many carriers, there is no new money in already stretched budgets to deal with this “old problem.” Carriers all know the reasons to make the change – inflexible technology and processes, rising maintenance costs, increasing demands from users and consumers, and a retiring workforce – just to name a few. Given that CEOs, CIOs and CTOs are ready to move forward, why is there not a greater sense of urgency among life & annuity carriers to replace these old legacy policy administration systems? And, what will it take for them to make the move?

Cost of Conversion

It seems that two main issues are standing in the way of this modernization: the cost of conversion given the long tail nature of the life & annuity business and the risk of multi-year, large-scale strategic projects. In fact, according to one McKinsey study, large-scale software projects overrun costs by 66% and overrun time by 33% on average. The same study points to the fact that these projects almost always deliver the expected benefits, but clearly it is a difficult proposition when dealing with strategic systems covering complex financial instruments and long-term promises like life & annuity carriers face. Some worry that although the benefits of modernization may be worthwhile; the process of getting there is not. Others have attempted to wrap older systems with more modern components, but the manual processes and risks remain at the core of these pseudo-modernization attempts.

So what is a carrier to do when faced with clear and attainable benefits, but a difficult path to get there? Most carriers are wrestling with the various options of transformation: BPO, SaaS/Cloud, modern installs, continued wrapping, etc. In truth, the best solutions probably lie in a combination of these options and in a longer-term view of the transformation effort.

Making the Business Case

At the core of any modernization effort lies a need to develop a strong business case for how to replace what seems like “paid for” systems that have kept the business going for decades. These business cases need to focus on productivity gains, business agility and future looking technology and business needs, over and above the anticipated cost reductions. This is the only way to see a compelling case for overcoming the cost of conversion question. This requires a deep understanding and executive buy-in of the potential for change that modern systems can bring, in addition to the understanding of the underlying cost drivers (like mainframe and support expense) of current environments. This is especially true as the blocks of business residing on legacy systems continue to decline – the natural result of the policy lifecycle in the life and annuity markets that may not hold true in the P&C market.

With a clear business case and business alignment in hand, an ideal path to modernization may be to approach the effort as a series of smaller, more easily digested projects to show quicker results and increase the success velocity, keep the change manageable, show interim ROIs and keep business sponsors bought into the transformation process. Perhaps a good modernization starting point would focus on a new product line (like Group or Worksite for many carriers), as an early win without potential conversion costs or risks.

These are complex initiatives that can be helped with consulting and vendor-partners that have walked the transformation path and can provide leadership not only in technology planning, but also in business case development, new types of requirements gathering, best practices, and the broader business process changes that modern technology can make possible.

Too many continue to wait on the sidelines because of the very real concerns noted earlier, but some life & annuity carriers are taking on these multi-year transformations today. The success of those life & annuity insurers who are modernizing sooner rather than later may spur on the rest of the market to make the modernization change, but those that continue to wait run the danger of waiting too long and being left behind strategically, economically, and competitively.

It is clear that combining business insight and vision with technology expertise helps life & annuity carriers deal with what is a complex challenge. Still, how insurers decide to act will set the stage for the next 30-year run. Those that continue to wait and wring hands over the clutter in the closet will not be setting the table for the new feast.

About the Author: Erik Stockwell is senior vice president and head of MajescoMastek's Life/Annuity Insurance Division. He can be reached at erik.stockwell@majescomastek.com or (704) 241-3027.